The new edition of the Cost of Regulation survey 2016 just published by ABBL and EY

For the second time, the members of the Luxembourg Bankers’ Association (ABBL) have been invited to participate in a survey to assess the cost of compliance to financial regulations. As in 2014 the survey has been conducted by ABBL and EY

Regulation: a significant component for banks
Based on these results, banks have spent up to €458m on a consolidated basis in 2015 in order to comply with the various regulatory evolutions. Compliance related costs have increased by 20% since the last survey and total compliance costs for banks represent about 1% of a larger GDP. These results are in line with the forecasts of the ABBL/EY 2014 survey.

On average, regulatory investments represent 35% of banks' investments. That figure might go up to 51% for the smaller banks. Budgets have reached record levels in 2016. Based on the banks surveyed, they should continue to grow further until 2018, marking the end of the implementation era of the post 2007-­? 2009 regulatory agenda, before a potential slowdown, also in line with the forecasts published in 2014.

Top five
The leading trio of the most expensive regulations for banks remain: the Capital Requirements Directive/Regulation (CRD/CRR IV), where investments have doubled compared to the last survey; followed by the Foreign Account Tax Compliance Act (FATCA) and the European Markets Infrastructures Regulation

(EMIR). However, if considering the new regulations, ABBL and EY believe that MiFID II is well on course to become the undisputed number one regulation in terms of costs. The top five is completed by tax transparency measures such as the automatic exchange of information.

Workforce
The regulatory-­?oriented segment of the workforce has also expanded to reach 13% of banking employment, with up to 3,300 FTE (full time equivalent) net after extrapolation. Obviously tier one banks represent the largest share. However ABBL and EY found evidence that regulatory related job changes can be more significant in smaller banks. Regulation definitely creates qualified employment in banks.

The positive impact on highly qualified employments is remarkable. These new roles are essentially created in support or control functions, accordingly they need to be financed by new activity, hence raising the bar to be or remain profitable.

Regulatory agenda
The following topics represent the most important measures listed in the regulatory agendas of banks for the coming years, and hence will absorb most of the efforts until the end of 2017 and probably beyond: the Anti Money Laundering Directive IV (AMLD IV), the General Data Protection Regulation (GDPR), the second Payment Service Directive (PSD II), the Package Retail Investment and Insurance-­?Based Investment Products (PRIIPs) and the Markets In Financial Instruments Directive (MIFID II).

Some disappointments among the banking community
While the banking community welcomes regulations making the financial system safer, it regrets the way they are designed, developed, brought to the market or articulated with one another. The lack of coordination put banks under pressure. Not only are operating models or IT not always adapted to these constant evolutions, but it is often the same staff that has to handle all regulation related projects. Even tier one institutions are stretched to the extreme at a time they are confronted with digital disruption.

According to Benoît Sauvage, Senior Adviser, Financial Market Regulations at ABBL and Denis Costermans, Directeur Associé at EY, who both participated fully in the survey “a final key takeaway of this study is that the bar to comply with all regulatory requirements is now at the highest. In itself, this may be both a barrier to entry and an opportunity to create new banking models, provided that regulations are embraced with more agility and not simply disrupting.”